Royally irresponsible

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Over the past year, a belief has taken hold that the main driver of wrongdoing in our banking and financial services is an unbridled culture of greed and self-interest.

Only by creating ‘cultural change’ within the banks, we are told, can we start to rebuild a financial system that puts customers before greed and profits. But before bank-bashing becomes a national sport, we should at least be honest that the avarice of bonus-hungry middle managers wasn’t the only deficit on display during last year’s Royal Commission.

Personal responsibility – that old-fangled notion that you bear the consequences of your actions – was also in conspicuously short supply. This is a problem because without personal responsibility, the raison d’etre of a free society quickly falls away. Sure, we’ve grown to tolerate nannying by government on all manner of things from plastic bags and straws to cigarettes. But for the most part, Australia is a country where the government leaves us to make the big calls for ourselves. We choose where we live, what we do for work, what car we drive, who we marry and how we spend our time.

This experiment in human freedom that began on a rainy island off Europe’s west coast some 250 years ago has been a rather great success. The emergence of an economy governed by the animal spirits of the market, not the whims of kings and feudal lords, is the chief reason why you and I enjoy a superior standard of living to Henry VIII. The catch is this system only works if we accept that sometimes it may all go terribly wrong. For only by allowing individuals to take risks will free economies like Australia continue to innovate, grow and prosper. In business, such risks can quite literally mean betting the house. Which brings us to one of the main bugbears examined by the banking royal commission: irresponsible lending.

Truth be told, the term irresponsible lending is a misnomer. If measured solely by risk, borrowing money to fund a new business venture is inherently irresponsible. Six in ten small businesses will fail within their first three years, a number that rises steeply for inexperienced entrepreneurs. It was this sorry yet predictable fate that befell some of the banking royal commission’s most high profile cases.

Consider the case of Carolyn Flanagan, a pensioner who offered up her home as security for her daughter’s small business loan. Flanagan’s daughter’s chosen venture, a Poolwerx franchise, folded owing substantial arrears. When Westpac moved to recover the debt by selling the home, Ms Flanagan sought help from Legal Aid. A settlement was later negotiated allowing Ms Flanagan to live out the rest of her life in the home, only after which the bank would take possession.

Just pause and ask yourself what exactly in this scenario was Westpac’s grave moral lapse? It’s tempting to say the bank should have known better than to allow an elderly woman to put her home on the line. Except that was already the bank’s usual approach, with evidence before the commission quickly establishing the case was an outlier and that Westpac’s official policy was to exercise ‘extreme caution’ towards parental guarantees. Nor was it standard to attempt to evict someone from their home to recoup a bad loan. Westpac’s ordinary course of action in such cases was to negotiate a life tenancy – an unobligated concession made solely for the benefit of consumers.

Besides, Ms Flanagan received independent legal advice and admitted she would’ve ‘signed anything’ to help her daughter. And if the sums stacked up for the bank, would it not have been an act of moralistic paternalism to deny her request? The fact that this single case generated dozens of sympathetic news stories says far more about the unworldly expectations we hold of our banks than it does about the state of corporate greed.

Even if Westpac wasn’t strictly at fault, it’s tempting to think government should still do something to prevent such loans taking place. But be careful what you wish for. A crackdown on loan guarantees would make finance even harder to access, pushing loans for homebuyers and entrepreneurs even further out of reach.

At a time when credit is already in sparse supply, this would be a handbrake on the whole economy. A well-oiled finance sector greases the wheels of commerce, allocating capital to its highest use. This fuels competition and enterprise, making each and every one of us better off. The problem with insisting that banks should loan more ‘responsibly’ is that winners and losers can’t be picked at the outset. Successful businesses are frequently hatched out of ideas a lot more far-fetched than Ms Flanagan’s daughter’s hopes of selling creepy crawlies in Sydney’s west.

This same pattern of fecklessness was at the centre of several unedifying spectacles brought before the Royal Commission. In another case, a 19-year old who received an $18,000 loan to fund a two-month sojourn in Europe took the stand to bemoan the bank’s ‘predatory’ decision to grant her a loan. Other banking victims were more aspirational. There was Linda Schmidt, a middle-aged nurse who borrowed millions of dollars to purchase investment properties on interest-only loans. As surely as the sun follows the moon, Ms Schmidt’s repayments rose, pushing her finances to the brink.

The point here is not to downplay the hardship of those who made a dud call and are now paying the price. But knee-jerk decisions, borne out of nothing more than heady sympathy, are the wrong way for policy-makers to respond. Already, academics, community legal centres and other boosters for wrapping the banks in red tape have begun to insist the Royal Commission’s recommendations do not go far enough. Their goal is to re-write the rules of financial transactions by imposing on banks ill-defined duties to always make decisions in a customer’s best interests. One solicitor from Legal Aid NSW, for example, recently argued that many of her clients simply don’t understand the consequences of using their home to guarantee a loan.If that is so, it isn’t because half of society is incapable of grasping what it means to offer up an asset as security. It points to an expectation, cultivated by culture, that regulation is needed to save people from themselves.

Ripping people off is always wrong. But isolated incidents of chicanery won’t be stopped by reinforcing the belief that people aren’t responsible for the consequences of their own actions. A more watchful eye from the corporate cop may well be overdue. But while we’re at it, we should drop the harmful assumption that when we visit a bank, glib assurances from an employee tasked with selling a product are a substitute for common sense.